Hard slog: Des Lyons has had a long battle with the Tax Office. Photo: Chris Hyde

"In the tax system, it is the obligation of the taxpayer to prove their case," Gold Coast lawyer David Hughes told the inquiry during a hearing in Brisbane last month.

"They bear the onus of proof. As soon as the assessment is raised, even if that assessment is all but plucked out of the air, that assessment stands and the Tax Office has the full power of the legislature to recover that tax debt."

One of the cases where the Tax Office made an incorrect assessment involved a client of Mr Hughes, 67-year-old Des Lyons, whose plight was mentioned at the inquiry and who BusinessDay spoke to.

Mr Lyons said after a "school bully" auditor left him with an incorrect $1 million tax bill and the ATO issued garnishee notices to his bank, the institution withdrew all funding and Mr Lyons nearly lost his marriage and had to sell his business - which he has bought back - his investment property, and his home.

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His case is typical of numerous others coming up before the inquiry, and like others predates the arrival of new leadership brought in to revamp the ATO's culture. It's a culture where young auditors take an aggressive "revenue-bias" approach. Numerous testimonies to the inquiry refer to ATO auditors as "ideologues", "cowboys" and "zealots".

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The inquiry has heard of other businesses being ruined, and lives being damaged, because Tax Office auditors go on "fishing expeditions" and cases drag out for years. Advisers talked of how, despite their clients having genuine grounds for appeal, they often settled because the financial and emotional cost of disputing a tax debt was too high.

Mr Mills told BusinessDay: "In the past there have been cases that were protracted and poorly handled, but we are changing our approach to ensure our staff training addresses those kinds of issues and to try to stop this happening in the future."

One of the main ways the Tax Office had changed the way it interacted with taxpayers was by picking up the phone to engage with taxpayers earlier, at the audit and the objection stage, he said. The Tax Office submission to the inquiry noted the agency had made reductions in the time it took to resolve disputes, with a median of 52 days in 2011-12 dropping to 39 days in 2013-14.

The agency was also offering an internal mediation service for individuals and small businesses, where trained officers facilitated discussions between parties at the audit stage to assist in narrowing or resolving disputes, Mr Mills said.

While some tax advisers said auditors were still reluctant to try the ATOs new internal program, Mr Mills said either the taxpayer or the ATO could request the service. "This is another way we are attempting to resolve disputes earlier at the audit or objection stage and prevent them from ending up at the Administrative Appeals Tribunal," he said.

They are promising signs, but changing the culture of an organisation with more than 21,000 staff takes time.

And as NSW barrister John Hyde Page told the inquiry, while companies such as Chevron were able to devote resources to fighting the ATO, smaller taxpayers could not. "It is appalling that somebody's treatment under the law should be materially affected by whether or not they can afford an expensive firm of lawyers to write them a letter of advice," he said.

Of the $18 billion in debt owed to the Tax Office, small-business taxpayers ac­count for more than 60 per cent.

For those who fight their case, the ability to then get compensation is limited. Mr Lyons knows that all too well.

His case, which started in 2011 and dragged on for two years, was sparked because of a simple and relatively small GST error.

It could have been settled quickly and without pain, he said. But the auditor decided Mr Lyons was hiding income from his Gold Coast restaurant and, based on what Mr Lyons said turned out to be incorrect calculations, issued him with the hefty bill that included interest and penalties.

Mr Lyons said early in the audit process, before issuing the bill, the auditor had made comments like, "I am the sheriff and I am the law", and after discovering that Mr Lyons didn't have a tinny boat, told him: "A tinny might be all you have left by the time I am finished with you."

"His attitude was very demeaning," Mr Lyons said. "He was very very aggressive."

Once the assessment was issued, the auditor used a garnishee notice. This is a common method used by the Tax Office to recoup alleged debt but for a small-business person it's a frightening prospect and, according to evidence given to the inquiry, is the main factor that is destroyed people's lives during tax disputes.

It allows the ATO to demand the taxpayer - or any person or business that holds money for the taxpayer, including their employers, financial institutions, real estate agents and solicitors - make immediate payments to the ATO. It can be a percentage of their wages or a lump sum amount. Deciding how much and when they pay is up to the Tax Office.

Not only is a garnishee notice issued before the taxpayer has a right to lodge a formal objection to the assessment, but hefty penalties and interest charges can be attached. In a recent review the Inspector-General of Taxation Ali Noroozi recommended the ATO not require taxpayers to pay penalty amounts until the dispute on the primary tax is resolved.

As with Mr Lyons' case, when the debt collectors come knocking people have to sell their homes, their businesses, their assets. For those who have built their business over 40 years or so, who have wives and families, it is all too traumatic, leads to mental breakdowns, and contemplation of suicide.

To address some of the concerns raised during the inquiry and previous reviews, Mr Jordan has injected new talent into the ATO, including staff that worked formerly in business. But that's mainly at the senior level and a friendly and commercially minded attitude takes time to trickle through the organisation. The fact that nearly one-quarter of almost 3000 job cuts at the ATO have come from its audit team also isn't instilling confidence in the agency. "This is clearly putting pressure on remaining staff to protect government revenue," Shadow Assistant Treasurer Andrew Leigh says.

Mr Hughes told the inquiry: "If the current commissioner stays for a long tenure, the culture will change over time." But he said the executive had expressed concerns to him privately that the message was not getting through to the troops.

The inquiry has to decide whether to recommend to the government to change the law to allow taxpayers to get proper compensation if they have a genuine case against the Tax Office.

Inspector-General Noroozi has flagged introducing a taxpayer bill of rights that is legally enforceable and allows people to claim compensation if they are mistreated. But introducing such a change would need to be balanced against the potential loss of revenue that might result if more people made claims. The possibility of more claims is high, given that the Tax Office is the third-most complained about agency to the Commonwealth Ombudsman after Centrelink and Australia Post.

The ATO and Treasury both oppose a split. Mr Jordan told the inquiry the ATO's independent review area ensured that if taxpayers had a gripe, they could go to someone in a separate area from the officers who did the audit to review the original decision.

But as it stands this independent review is available only for the big end of town, and in any case while the Tax Office thinks it is working beautifully, tax advisers don't think it is independent enough.

Some want the review area to be taken out of the Tax Office and a new agency to be created. Others say it should stay within the ATO but have a separate commissioner.

Mr Lyons, who is considering whether to seek what limited compensation might be available to him under the system - and whether he is eligible would be at the discretion of Mr Jordan - said he was glad the Tax Office had brought in leadership with business acumen.

"Chris Jordan's seen it from the other side of the fence and he says he is taking steps to fix things," Mr Lyons said. "I hope that's what he will do. I hope he will make a big change, so taxpayers are treated fairly and not treated like people that are criminals."